Russ Roberts

Papola on the Keynes Hayek Rap Videos

EconTalk Episode with John Papola
Hosted by Russ Roberts
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John Papola of Emergent Order talks with EconTalk host Russ Roberts about their collaboration creating rap videos based on the ideas of John Maynard Keynes and F. A. Hayek. Their first was "Fear the Boom and Bust" which was released January 25, 2010. This past week they released "Fight of the Century." The latest video discusses the overarching differences between the philosophies of Keynes and Hayek and their views on whether government spending promotes recovery from an economic downturn and whether it leads to prosperity. In this conversation, Papola and Roberts discuss some of the underlying ideas in the video--whether the military spending of World War II ended the Great Depression, the debate between Malthus and Say and their influence on Keynes and Hayek, and the fundamental differences between Keynes and Hayek in how economic prosperity is created.

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0:36Intro. [Recording date: April 29, 2011.] Weird setup, interviewing both of us. The second Keynes-Hayek rap video, called "The Fight of the Century: Keynes vs. Hayek Round 2," debuted this past week. I thought we'd talk a little bit about our collaboration, and then some of the economics issues involved in the video and the lyrics, and finally try to give the listeners a little bit of the behind-the-scenes about how hundreds of hours of your time and mine and dozens of hours of filming time got turned into 9-10 minutes of video. Remarkable story, fun for me to see behind the curtain of the process; thought some of our listeners would enjoy that as well. At the end of the podcast, we hope you will hear the song itself. You can find the video at EconStories.tv, which John and I archive--the rap videos we produce as well as interviews we've done with other folks that are related to the material in the videos, Robert Skidelsky, Larry White, and we hope down the road, others. Let me just say, Russ, that in a lot of ways, being on EconTalk today brings me full circle. Tell us why. This is as good a place as any. My interest in economics began a few years ago--really 2007. I began reading a lot; I had a lot of time with my bus commute. I'd read a book called The Black Swan and was just blown away by the book. Nassim Taleb was on the podcast, talking about the book. And so, I was getting into these podcasts, because I get motion sickeness when I actually read books on the bus, so I listened to that book. And I googled Nassim looking for interviews with him, to see what other content; and on his website, Fooled by Randomness, was an interview. And I was very excited, so I downloaded that; it turned out to be his interview with you on this podcast with EconTalk. Listened to it, subscribed to it, became a fan. Became my primary source of economics education--EconTalk on my bus. Frightening! But it turned out fairly well. Of course, you had a few other things you are interested in. One thing I want to mention from the top, bizarre thing--I don't do a lot of collaborating. Pleasure of collaborating with somebody, which of course has transactions costs. We spend a lot of time on the phone and emailing each other and probably another amount of time looking for each other. But, one of the pleasures of this collaboration has been the equality of it. A little unfortunate: a lot of people may watch the video and go: Well, Russ Roberts is the economist and John Papola is the film maker. But it's not just EconTalk. John is self-educated in economics in a really wide range of stuff and reading and contributes at least 50% of the lyrics and the ideas. And similarly, I try to contribute at least 50% of the visual ideas--not the actual filming, that's John--but certainly in the story narrative, we work totally together. In my experience, a lot of times 1 + 1 = 1.4, or 1.7; but it's equal to 3 in this case. We really had a great deal of fun doing a bunch of stuff either of us would struggle to do on our own. One of the big surprises for me with this whole process, with "Boom and Bust". Ignore that noise in the background, John; that's very appropriate that the listeners can hear some noises in the background. 'Cause that's how it often is in these conversations. We've got the rest of our life going on. For most of the time in the past this has been a side-project we've had to squeeze in, in all kinds of places and settings. It was a pleasure to discover that Russ was actually as big a Mac fanatic as I am, and we both enjoy and scorn our communications devices. Here we are video chatting over the video and yet plain old telephone calls are surprisingly difficult technological events.
5:50We got talking a long time back, I think spring of 2009, John approached me and said he'd like to do some kind of video; and I thought: Nice idea, but video is very time intensive, don't know if I've got this kind of time, some crazy guy calls me from New Jersey that he likes EconTalk. Just thought this is going to be a time sink. Which it was, by the way. But not a wasted time sink. So, John calls me and he says let's do a video; and I said: Look, I don't have a lot of time. If you can start the process going then I'll continue to email and correspond with you, etc. I've done this with other potential collaborators and they always fall by the wayside, but John did not. He relentlessly pursued the idea that we would do something together and basically forced me to get back to him often because his stuff was so good. We eventually decided we would do a sitcom--or Keynes would come back to life. At this point we were in the middle of the stimulus package and its so-called impact, unknown impact, claimed impact. We thought: Since Keynes has somehow recovered from the ignominy of the 1980s and 1990s when he was totally dismissed by the economics profession, let's do a sitcom where Keynes comes back to life--because he always seems to; and he's a struggling assistant professor in New York City. We were going to have his love life, his financial problems--we had a lot of fun talking about that. Then one day one of us said to the other: This is kind of nice, lot of fun imagining all this, but let's actually do something. We're not going to produce a 30-minute pilot--we don't have any money. Why don't we just do the theme song for that sitcom? We decided to pick "Stayin' Alive," from Saturday Night Fever. Show Keynes's wingtips coming down Broadway, like John Travolta's shoes in the movie. But that didn't work out. Why didn't it? The first thing we did--and I think you came back at me with a full lyric. We had some great lyrics for that. We played around with it, I did some revisions on it; and then I tested it. One of the parts of the process is we do what's called a scratch track, which is, you don't want to spend the money and time to record professional voice talent till you've really secured and locked down the timing and wording and everything. So, in order to test this thing out, I downloaded a karaoke version of Stayin' Alive, and then recorded myself--horribly. I thought: Hey, this is pretty good right now! Let's just stop! Great, we're done, let's get filming. We decided not to go that route. We were worried about the Bee Gees, to be blunt. Some people told us it's parody and we could do whatever we want with it. Other people said maybe it is, maybe it isn't; maybe we should buy the rights from them; what if they don't like it. We were worried that we'd gone to all this trouble and then we'd lose the rights to it, have to take it down off the Internet. That's going to be pretty depressing. So we just said: That's no problem. Let's write our own song. We went back to the drawing board, as happens a lot in this process, the creative process. There's a lot of destruction within the creative process, never mind the creative destruction that happens after things are finished. We have a saying for that in the business: Nicer babies. Really awful. In writing, first heard it from Truman Capote--don't know if it's really his line: You have to kill your darlings. The things you fall in love with. It's gotten more gruesome. For film. You create something, you fall in love with it; you've got to cut it sometimes. There were the rights issues; but I think even deeper than the rights issues was: That piece was really a slam on Keynes. Correct. Really just a mockery of Keynes and him walking down and treating him like a spendthrift. It had a very ad hominem approach to it. We decided at the end of the song his ATM machine would be empty, they'd be rejecting his card because he borrowed too much. It was amusing; we got a kick out of it, but it wasn't very nice. That wasn't how we wanted to treat an intellectual giant--who we happened to disagree with--but who was a pretty influential and intelligent person. So we decided to take a different approach. For me, the reason I reached out to you in the first place was you bring people onto this show from a lot of different points of view. You don't hide your own, but you spend a lot of time thinking about it. I think I've listened to multiple podcasts about the nature of your own bias, which is interesting. I just think that's the right way to do it. We have a point of view; we don't hide from that, we're proud of it; but there's no reason why we can't both have a point a view and treat the alternative point of view with respect. I'm probably most proud of not just the outcome of that effort but of the amount of time we've spent doing that, putting verses in and taking them out, considering their impact, accuracy. Is this the strongest case that he would make? Also, I think an important thing to note about both of these pieces is they are not historical works. This is Keynes as we see him and sort of his modern proponents. These are amalgamated characters. They're not: This is what Keynes himself would have said, or what Hayek himself would have said. They're both dead. We don't know what they would have said. We're speculating. And of course, we are drawing on their modern proponents; and we're trying to be fair to the overall vision.
12:54Digress on this, interesting to me. Most people enjoy the entertainment aspect of these videos, but there is a serious intellectual message in both of them, and we are proud and excited that people use these in the classroom--in high schools and universities--as conversation-starters, stimulators of intellectual ideas and discussion starters. The way it often gets discussed is: Are we biased? The answer is: I don't think we're biased. But we have an ideology. We have a philosophy. We're pro-Hayek. Hayek looks good in both videos. So does Keynes. We think he's the winner intellectually, but we try to present Keynes fairly. That's the key point: not whether we are biased about Keynes's views, but whether we represent them fairly. Of course, to some extent, we caricature Keynes. But we caricature Hayek, also. We only have 7 and a half minutes or so of music in this, and we have to simplify a little bit. We're going to have to imagine what they might have said about modern things. To me, the biggest stamp of approval we ever received, and I don't think we can ever do better than this, is that Robert Skidelsky, who is Keynes's, one of his most impassioned advocates and certainly the most respected biographer of Keynes, gave our lyrics of Keynes's the stamp of approval as being fair. I think that's all you can ask for on both sides, and we're both very proud of that, obviously. These ideas of fair and bias are themselves so subject to interpretation. When I think about what does it mean to be fair--this isn't a fully formed thought--I think I'm not going to knowingly withhold information or knowingly distort what it is that's going on and what I think is Keynes's point of view. But we're really going to put an effort to have his argument be the best he can make. I just saw a review of the new one by a reporter that said just that: It's definitely pro-Hayek, but Keynes makes his best arguments. Flattering. Important that we both care strongly about that. Of course, it's easy to say that. Maybe we're fooling ourselves. When one of my George Mason colleagues says we're fair to Keynes, I take that with a grain of salt--because he's not a big fan of Keynes and neither am I. But that's for the marketplace to decide. If people use it in the classroom, if Keynesians use it in the classroom as discussion starters, that's really what we're all about.
16:00I want to talk about some of the economics in the song, important to both of us, a little subtle. If you go to the lyrics itself for the current video, "Fight of the Century," we spend a reasonable amount of time talking about war, and particularly WWI as to whether it ended the Depression or not. Why do we spend so many verses on Keynes talking about it and Hayek trying to counter those arguments? Keynes was not a warmonger, and I don't think we try to present him that way. We don't talk about him that. He wrote The Economic Consequences of the Peace. He didn't advocate war. However, he did on multiple occasions say that the spending that war induces could be good for the economy when there's "slack capacity," when we're below full employment, whatever that really means. In 1940, in the New Republic, he wrote something, I believe the effect of it was: In capitalist democracies only wars can cause governments to spend enough to prove my case. He wasn't saying we should go to war to fix the economy. He was just saying it might do it, it might fix it. Then we see, it's not just war, though, because natural disasters can do the same. Larry Summers made a quip about how the tsunami in Japan could lead to economic strength. The charitable reading of that is he's trying to put a silver lining on a tragedy. That could be. He's not just some guy; he's a pretty influential figure. I think the best way to put why I think it's important to attack this subject is to talk about the way Keynes saw the role of economists and intellectuals. That practical men don't take verbatim the words of these intellectuals, but they take the echoes of them. They have their own confirmation biases. One studious, very narrowly defined way in which a war could increase the velocity of money suddenly becomes: Well, war does really improve the economy. That's what happens, that's what happens in the culture when these ideas get migrated and translated through time. Now we live in a world where most Americans think that WWII brought the end to the Great Depression. I want to come to the details to that in a second, but I do think your point is extremely important about the cultural ramifications of an offhand remark that isn't taken very subtly. One of the subthemes of our video is the way that politicians use economic arguments to serve their own self-interests, and how special interests can thrive from that kind of rhetoric. That's a kind of Hayekian theme. It runs all through The Road to Serfdom. If you decentralize power and you don't get the ideal solution that someone might be advocating but something rather different. Both of us are very disturbed at how adding to the benefits of war economic improvement is a very dangerous idea. It also, we think, happens to be wrong. I want to make that clear. We're not against it because it's dangerous. We're against it because it's wrong. But then when you combine that with the fact that it is dangerous, that it gives politicians an excuse for wartime spending, I think is a really bad set of incentives. Easy for those of us on our side, to pull Paul Krugman quotes out just a bit about anything we want to prove that we don't like. There were two quotes that kind of stand out about this issue. One was on September 14, 2001, when he said this event, like the original day of infamy, might do some economic good. This event being the terrorist attacks on September 11, 2001. That the rebuilding might spur the economy. And then again in 2008, responding to a very Keynesian statement made by George W. Bush about the positive effects of the Iraq war on the economy--the alleged positive effects--Paul Krugman found himself quite out of character in agreement with the President, that: Yes, he thought the war was number 2 on the list of things that contributed to the economy's growth throughout that period. Those are very powerful and in my personal opinion very frightening ideas to echo repeatedly. Of course, the response to that goes back to the middle of the 19th century--probably further. Frederic Bastiat, the great French economist--called the Broken Window Fallacy--the idea that breaking windows, that destruction, can somehow create prosperity is, we think, false. The other people who agree with it, promote it, sometimes I just find it bewildering.
22:24But let's go back to WWII specifically. Basically, the Great Depression has its worst moments in 1933. Unemployment hits 25%. The economy starts to recover in the sense that GDP starts to grow. By the end of the 1930s, though, a second recession occurs; 1938, unemployment rises again. Basically the economy doesn't get healthy again until about 1946. So, inevitably there's the temptation to say: Well, between 1938 and 1946 things got healthy again; what happened between them? Well, there's an immense amount of government spending on defense. And so therefore war is good for the economy. The intellectual underpinnings of that would be a Keynesian argument about the multiplier effect. That government spending pumped into the economy, massive increases in government finance, government spending, put money into the economy: that money got spent; and then that money got spent. Before you know it, we're back to a prosperous time. That, by the way, is the revised myth of the Great Depression. The original myth was the New Deal ended the Great Depression. Franklin Delano Roosevelt (FDR) saved the country. This myth was promulgated by pro-FDR historians. Economists began to reject it at some point. People started eventually to say the New Deal might have been window-dressing, might have been the mood of the country. Especially the Keynesians went around saying: Well, we never really tried Keynesianism in the 1930s. Roosevelt was too afraid of deficits. It was only the war--coming back to your point about the New Republic article of Keynes--it was only the war that forced Roosevelt's hand. He had to spend a lot; and as a result we got the Keynesian cure. That's the story. What do we think is wrong with that? Everyone should excuse when I screw up technical terms; I am still an amateur. But it seems like one thing that's weird about it is it seems to confuse the flow of spending and the stock of wealth. My understanding of what GDP is, is it's essentially an accounting of the transactions that took place over some set period, like a year for example. It doesn't really represent the value of the assets over time or whether they are good or not good, or whether those transactions were building bridges to nowhere or building iPads and new cancer cures. There's no means within National Income Accounting to distinguish between things that are good and things that are wasteful. That's one problem. A more technical problem is, the usual answer of the economist is: Well, if people buy it, it must be valuable. The problem with wartime spending is that it's bought not by individual decisions of the consumers, but by the government in the pursuit in a potentially very valuable enterprise--could be defending yourself--could be horrible, could be attacking someone who doesn't deserve it. Just want to say: All of what we say has nothing to do with whether a particular war is just or unjust. Just as the people who talked about 9/11 being good for the economy weren't justifying 9/11. They always preface their remarks: This is a human tragedy; but let's just look at the economic impact for a moment. That's the silver lining argument. We agree it was a tragedy; we reject that there's a silver lining. It's imaginable there could be in some, but most of these cases don't strike us as having a silver lining. The reason we're talking about government spending--government, versus personal choices that people make, the prices that government pays are not market prices. So, in particular, when you are trying to aggregate across all the goods that are being produced in 1943 versus 1923 or 1933, it's very different because a lot of the goods being produced by the private sector for government, and their true value is very hard to measure. In addition, you can't eat a tank. You might want a tank to protect yourself from attack, but a tank is only used for that purpose. It produces no independent enjoyment. And finally, the prices of the non-tanks, the other things in the economy during WWI, were all under price controls. Not all, but most. So, all the ways we usually aggregate value, by multiplying the spending people make, counting up the monetary value of the transactions, all the ways we do that during wartime get distorted. What we draw on in the lyric of "The Fight of the Century" is the work of Robert Higgs, EconTalk interview where we talk about this explicitly. The idea is simple: The Keynesian multiplier, as Hayek sings in the song--there was no multiplier. Consumption just shrank as we used scarce resources for every new tank. It's possible that there's enough surplus resources laying around that you can get a tank as essentially a free lunch for the economy as a whole. The resources that go to make the tank weren't doing anything, so now you get a tank and you get people working, and that's great. But if those people were doing something else that was productive--some of them, maybe a lot of them--if the iron and steel that goes into the tank could have been used for something else, then it's not free. It isn't an unemployed resource. What you are doing is just driving up the price and making it scarcer for other people. So, it's essentially an empirical question: Was there some kind of Keynesian multiplier in WWII? And the answer is, when Higgs looked at consumption outside of the military sector, he finds that people had access to less. We know they had access to less. That's why there was rationing. So, that's why Hayek says in the lyrics: Pretty perverse to call that prosperity: ration meat, ration butter--a life of austerity. Yes, as Keynes says in the song, GDP was up. Yes, unemployment was close to 0. But Higgs points out, correctly, we believe, that if you conscript everybody and force everybody into a draft, it's easy to have full employment. The question is what do you get to eat? If there are a lot of people in the army, you are going to get less to eat; and that's what was happening in WWII. It happened for the Americans, for the British. Didn't have prosperous time in England during the late 1930s and 1940s when they had to spend desperately more resources in the military. It certainly wasn't a good time in Germany in the 1940s as they spent more. Want to emphasize: This does not disprove Keynesianism. We are not claiming that WWII--which I believe Higgs showed definitively led to a reduction in the economic standard of living outside of the military sector. Everyday Americans had a harder time in 1941, 1942, 1943, 1944, 1945 than they had in healthy peacetime. And the reason is simple: A lot more resources, human and material, had to go into making tanks, bombs, and airplanes. Might have been a good idea. But that's not the point. The point is: was it a good idea for the economy, for output, for production? It was for those things. It didn't stimulate the rest of the economy. But that doesn't prove that Keynes is wrong. Even a Keynesian would admit that if every worker was staffed in the army and fleet, you'd have full employment with nothing to eat, as Hayek says in the video. At some extreme--and that's our simplest point--if you devote all your resources to digging ditches and filling them back in or fighting a war, you don't get prosperity. You get desperate poverty. Now, it's possible there is some amount of government spending in between there--and we're skeptical of this but it's possible--that there was some smaller amount of government spending that could have just soaked up the resources and not start to bite in to the other productivity going on in the rest of the economy. But that isn't what happened in WWII. Our claim is that WWII is not evidence for Keynesianism. That's all we're rejecting, the standard myth that WWII cured the economy.
31:13Couple of things I want to add to that. One of the things we're leveraging, one of the contributions of Austrian economics that actually has gotten widespread acceptance, and that's the notion of subjective value. Which goes back to Carl Menger. Prior to the marginal revolution there was this quandary: Why is it that diamonds cost more and are valued more highly than bread? You can't eat diamonds. Objectively seem silly and worthless. Yet the cost dramatically more than bread. Turns out--and this is one of the few definitive things in economics--economic value is measured through subjective decision-making. It's that intersection between what people desire in their mind and have the means to get. It's not desire really; it's demand; I have to have the means to buy the things I want. I want a Lamborghini, but I don't have the means. And the supply. So, if there's not a lot of supply and there's a lot of demand, the price is high, like diamonds. And if there's a lot of supply relative to demand, the price is low. I think when we talk about this quirk about war and price controls and government spending, it's not that there's no value there. It's that we don't have an economic way of measuring it. We don't have a good yardstick. I was speaking to David Henderson, who has done a bunch of work on this stuff, too; and he brought up an interesting point. He said: A student of mine said: is this a reasonable argument to make about the value problems, because locks on our doors are measured in GDP and they are not food, but we do need that security and we measure that. That's a very good point. There's a lot of value one can argue about that was created by fighting WWII. I can't argue that. I'm not in a position to do so. But I don't think economics as a framework for understanding the world can get at that. But that's a separate issue. It's true that it's hard to measure that. But we have some measure of the value of security. The amount that we spend on locks, an alarm system, tells us how much people are willing to pay at least to have a little more certainty about their own security. That is different than wartime spending in terms of the yardstick because of the way the market produces locks, alarm systems. The market system doesn't produce tanks. Those are done collectively through the political process. And that's fine. It just means it's harder to measure. I just think that's a bit of a red herring. The point I want to focus on is: It's not that important whether government spending on war is worth it or not, whether WII was a good war--which most people believe; I do. That's not the issue. The issue is whether in the course of that war, was there a spillover into private consumption and production because of this stimulating multiplier as government spending pumped through the economy. That's the point I want to focus on. That's the point that doesn't seem to have happened. You look at the aggregates and people say: Oooh, but unemployment was low. Yes, it was. That's easy to do. It's easy to have unemployment be low if you force people to work. We could institute slavery today. Or pay a million dollar a year jobs in the government and decide how many we wanted. That doesn't create prosperity for the economy as a whole; it might create prosperity for the people who get those jobs, depending on how many we decide to produce and create through the political process.
35:41Can we use this as a jumping off point to my favorite geeky subject, which is Say's law of markets? We can, but to do that, though, I want to say one thing. Let's close the WWII discussion. In the video, Keynes and Hayek each have two corner men helping them out. In a normal boxing setting one would be a trainer and one would be a cut man--a person who would help stop the bleeding in the case of a punch that caused bleeding. Our idea was to put their trainer and cut man to be their intellectual helpers and we had a lot jokes, we couldn't pull them off, where instead of taking care of them between rounds with water and towels and bandages or stitches, instead they would bring them articles to read, books to look at. The idea was who would you put in your corner. Hayek has Ludwig von Mises in his corner, and we did a podcast with Pete Boettke where he talked about Mises and Hayek. But John said: Let's put Jean Baptiste Say [J. B. Say] in his corner. I don't know much about Say. So, why did you want to put Say in there, John? As I've been doing my geeky reading, strange serpentine past that I teach myself, certain things that I dig deeply in and disregard other things, one of the things I noticed about the arguments made by Keynes and the way it's discussed is he was claimed to have overthrown this important idea of the "classical economists" which was Say's law of markets. What Say's law of markets, in its cartoon version says, and it's not really the right statement, is: supply creates its own demand. If the average person--maybe not the average person. Most people who know what Say's law of markets is in some form say: That's supply creates its own demand; that's like supply-side economics. But as I read through this material, what I found to be a very interesting concept was that it's not that. I can't go in my backyard and make a mudpie and maybe there will be someone there to buy it. It's that production is the means by which we empower ourselves to demand other things. Which, a simple way to think about that, is: If I want to buy a pizza, I have work and sell my good and earn the money to buy a pizza. I could make myself a pizza, but that's not what we are talking about. We are talking about exchange and economic activity. If I live in a barter economy, I have to find something the pizza maker wants, but fortunately in a monetary economy I don't have to do that. I just have to produce enough value that someone--someone--that is equal to the value of the pizza, and then I can have one. That's right. So, what that insight points to is where purchasing power ultimately is derived. It is ultimately derived from the production of valuable things. It is not derived from demand. Because demand can't come first. If you and I are dropped on a desert island and have nothing, we can't demand anything. We can't trade. I have to go off into the woods and knock down some coconuts and you have to go fish, and now we have produced and we can trade from there. We might desire a hammock or hut or air conditioner, but that's meaningless in that setting. So, Say's law of markets is this very subtle idea. There are some relatively short pieces about it that I found really illustrated this for me. That's where wealth comes from--you have to produce wealth. That Austrian value proposition, how do you value wealth--well, you value it based on what people want. Subjective. If I go in the backyard and produce a mudpie, nobody wants it and it has no value. The first video, "Fear of the Boom and Bust," we said: It's devalued capital that makes up the slack. So these vacant homes in Nevada, they are still physically there; they are still part of the "capital stock." But if nobody wants it, its value might be 0. So, when Austrians talk about the destruction or consumption of capital, they are talking about the valuation of these things. In the current video, "The Fight of the Century," the key line is: Jobs are a means, they are not ends in themselves. People work to live better. To put food on the shelves. We don't grow the means of production of what people demand--here comes the sticking point for some Keynesians--That's entrepreneurship, not your central plan. The gist of it is. John's very excited that that verse survived our mutual scrutiny. Because that's Say's law, or Say's insight; contra Keynes. It's a bit cryptic, but that's what we are trying to say there. The broadest way to think about it is the Keynesian view focuses on nominal spending. In a monetary economy, that root source of where the purchasing power comes from does get complicated. The most interesting thing about this, and it really informs the title, because it could have been called "Fight of All Centuries," because the debate between Thomas Malthus and J. B. Say, which played out a hundred years prior to Keynes and Hayek, was essentially just Keynes and Hayek.
42:13Let's turn to that. I think Malthus--we've got Malthus in Keynes's corner, which for most people, including myself--John knows more economic history in areas than I do; I didn't understand this or know why you wanted to put Malthus in Keynes's corner. Why was that? I have to credit Brad DeLong, because he has written over the past few years about this debate and he was writing about it from a point of view trying to discredit Say's Law. But he brought up a lot of great information about this debate. His point was that Malthus posited that you could have a problem of underconsumption, which is there would be a general glut of goods, a want of goods. There could be too little consumption and too much production and you would have goods piling up on the shelves and thus you'd get a recession. The reason for this--the animal spirits filled in this for Keynes, but that's just insert x reason. The classical view is you have this excess supply that people don't value; the price starts to fall; that makes it more attractive than it was before so maybe people start buying them. Or maybe people make mistakes, they build mudpies and try to sell them. They go out of business; they'll try to use their talents to sell something else. Might take them a while. That's the entrepreneurship part. The argument that Say made in return was that the inability of producers to sell their goods is a signal of a production failure. Or you could say a coordination failure. So, it turns out, for some reason, that producers went about making goods that people didn't want as much as producers anticipated. People make mistakes. In our recent case, too many houses got built relative to what people genuinely wanted and could demand with funds. So, that round was relatively decisively won within the intellectual consensus. The mainstream. By Say. So, 100 years have gone by when Keynes essentially reasserts the exact same argument, this under-consumptionist argument that its total demand or effective demand that needs to be maintained; and that you can have a shortfall of effective demand. And the paradox of thrift comes in here. People save, don't buy enough stuff, and suddenly the economy is in the doldrums. "Fears of the Boom and Bust" focuses on this a lot more than "Fight of the Century," but the way I think about the general glut--you see slack in some sectors as a general glut, but some sectors are healthy, only some in a rut. That's Hayek's line in the lyrics in "Fight of the Century." So, the spending's not free, that's the heart of the matter; too much is wasted as cronies get fatter. That's political commentary. But the heart of that gets the heart of aggregation and what this general glut means. My little pithy way of saying it is I've never been to the General Goods store; I've never been able to buy or bid on aggregate supply. There's no market process, no trucking and bartering for aggregate supply, because aggregate supply is not a thing. It's just an ex post summary of the goods. It's an abstract concept that purports to help thinking. My understanding here--and this is the point Brad DeLong makes--is that well, Say, we're talking about this world where prices adjust and things move around, but what happens if instead of people buying more houses they buy something else? That demand for something else causes resources to allocate. But what if they don't? What if they are scared and they just hoard money? The thing that is so funny about all of these things are to me is how old all of these arguments turn out to be. As I read more and try to fill in my understanding, apparently David Hume, going back yet another 100 years, was aware of the idea that hoarding physical cash was no different than destroying it in the short term, and there could be effects on the economy by hoarding cash.
47:19Let me bring us to the current economic situation, because these are abstract ideas. Let me try to apply them to the recent stimulus spending. The Keynesian argument--and again, I want to be fair to Keynes and his proponents, so I'm just going to quote Joseph Stiglitz, Nobel Laureate, proud admitter in Congressional testimony that digging ditches and filling them back in will stimulate the economy. Some say it's a joke, Keynes didn't really mean that. Modern Keynesians certainly mean it. They argue it doesn't matter what you spend it on, because there's a glut. There's too much stuff, there's underdemand, aggregate demand isn't big enough, and all we have to do is spend enough. And when confronted by the fact that the economy is still struggling, they say: Well, we should have spent more. As Keynes sings in the video early on. Would be even better. Our counter is: Yes, there are sectors in the economy where there are scarce resources. And I'll stick with your Nevada example. There's a lot of unemployed carpenters and electricians in Nevada because they built a bunch of houses; there was a huge increase in house building, whether it was because of animal spirits or government policy doesn't matter for this point in the discussion. There was a huge increase in house-building and a lot of people were drawn into those sectors. And as a result, when there was no longer a demand for new houses, those folks were faced with a decision, which we've talked about on the program before with Arnold Kling in a recent discussion, they have to decide. Should I go back? Should I do something else? Wait till the housing market recovers? There are a lot of unemployed electricians and carpenters. So, to help that unemployment rate, which is very sector- and geographic-specific, the U.S. government decides to spend an extra $800 billion in hopes of helping put some of those carpenters and electricians back to work. Well, where did that money go? A third of it went to a tax rebate. Didn't change incentives. That was spread out across the whole economy. It wasn't focused in Nevada or Florida or California or where a lot of those carpenters and electricians are unemployed. It helped maybe some of them. But it was a very untargeted set of spending. About a third of it went to help state budgets that were in trouble. So, school teachers and police and firefighters were either kept on the payroll or not unemployed as a result. That certainly didn't do much to help carpenters or electricians. And the last third of $800 billion--we started at $700 billion, now they say it's about $820 billion--went to a bunch of stuff. A little bit of road building, very little, as John Taylor has pointed out. The bulk of it went to politically powerful folks. Those are the cronies who got fatter, and those cronies include my industry--education. A lot of universities got increased research budgets. That's nice stuff, that's fine. Could be good, could be money well spent, money taxpayers could be glad at how it was spent; but let's not pretend it helped a lot of carpenters and electricians in Nevada or Arizona or California or Florida. Now, maybe it did. Maybe some of that money went to build a new research building. A lot of it went to increase the demand not for oversupplied unemployed resources, but for very scarce resources. Ph.D.s and M.D.s where the unemployment rate is close to 0. And what that does is pushes up the price and wages for those folks--which is great for us--but let's not pretend that that's going to make the economy as a whole better off or healthy. It doesn't. That's what Hayek's singing about in that line. "Real growth means production...". No, before that. "You see slack in some sectors as a general glut / But some sectors are healthy; only some are in a rut." Only some are in a rut. That's the heart of the matter. It's not all wasted. It's not just a payoff to politically powerful people. But its curing effect, its impact on a healthy economy is extraordinary muted because it's not targeting the sectors that are struggling. And even if it were, it would be short-lived, because that's not the way to solve it, either. It's easy to put carpenters and electricians on make-work and pretend they are productive again.
52:00If I can make one more little piece about this, because I think one of the biggest criticisms that some careful Keynesians might read into our song is when Hayek says: Not your central plan. Keynes was not a central planner in the sense that he believed in Soviet-style central planning. He was not a socialist. That's not the point we are trying to make. There is a limit in the brevity of a rap song. But the point in that is that there is an argument that I think is pretty powerful about how do organizations and people go about discovering what to produce. When we talk about: some of this spending could be productive and some of it couldn't be. That has to raise the question: By what process does government or anyone determine how to go about spending and investing and using resources? And I don't see why recession suddenly makes that easier for the government. My vantage point on this, and I'm more than happy to hear why I'm wrong, is if the government is capable of determining how to spend that money, then socialist calculation should work. Government should be able to do a lot more than just that particular project. They've clearly got some mechanism of determining what's valuable to invest in, that doesn't involve the market prices, the market process of trucking and bartering and individuals and emergence of prices out of that. They can say: We need to produce more electric vehicles because of something other than the market price because the market price is telling me we shouldn't, because people don't want to buy them, and so I'm going to ignore that and use government entrepreneurship to produce more electric vehicles. I don't see why recession, which makes life harder for every other entrepreneur, should make the calculation process easier for government. I don't get it. There's a stronger case for that line about central planning, which is in the General Theory, Keynes does allude to in the later chapters that the real social reform shouldn't be countercyclical spending but should be the socialization of investment. I don't know if this was mean to mean that the government should essentially take over the stock market, or take over banking and basically allocate capital. But it's pretty close to central planning as far as I can see. So, that's my defense of that line, which I know some people have criticized. Maybe rightly. But there's a thought process there. It's not simply a slam on Keynes that he's a socialist. That's a great point. We're making a subtle point there, but with a slightly blunt instrument. Somebody has to plan where the money gets spent for that stimulus. If that's not central planning, I'm not sure what is central planning. But again, they're not arguing about taking over the whole economy. Just $800 billion. Government is at about a quarter right now of GDP. Not quite socialism, but central planning of some kind. Not the full thing.
55:47Nice to let you talk about some of the intellectual issues that you brought to the song and that you brought to me, issues I wasn't as aware of. Fascinating experience. We wrote the song, we had a version of the song "done" maybe four months ago, and John said: We're missing this point here. Actually, at that time I said: I'm a little tired of Say's Law. Just not mainstream; the average person isn't as interested in it as you are. But I think I was wrong. I think it's true the average person isn't interested in reading Jean Baptiste Say, but I think this fundamental idea of the discovery process is very Hayekian. I think it's very cool that Say is in Hayek's corner, and that certainly what you've just been talking about about the difficulties in finding out what people value and what we want and how we get out of the mess we're in and why, no matter what the causes are, you'd think government would know what the carpenters should be in the new world--I'm really glad that you pushed to get those ideas into the lyrics. One last piece on it: I do not personally reject that there are short run monetary effects. There is lots of space in this discussion for some of the types of arguments I've read from Keynesians. This piece in our whole enterprise is about opening up the dialog and giving Hayek a seat at the table that he used to have, and going from there. Yes, we're with Hayek, yes. But also, we're very skeptical about this whole enterprise. As Hayek was. Which whole enterprise? The enterprise of macroeconomics. The good news is I hope you enjoyed the conversation about the role of Say and Hayekian thought and how we put it into the video. We did not get into what I also wanted to talk about, which is also very typical of our conversations. We get in some digression and we don't make progress about exactly what we wanted to but we learn a lot along the way. I really wanted to get into the nuts and bolts of film-making, which John is superb at. We're going to put that for another podcast down the road perhaps. I want to come full circle. You call it "the enterprise"--macroeconomics generally. The lyric is? Hayek's final blow is not a takedown of Keynes and a celebration of Austrian business cycle theory. Rather, it's a deeper point and one I think Hayek arrived at later in his life, which is about the nature of economics and social science and what we can know. Hayek lines up for his final conclusive moment, and he says: The lesson I've learned is how little we know / The world is complex, not some circular flow / The economy's not a class you can master in college / To think otherwise is the pretense of knowledge. That's a reference to Hayek's 1974 Nobel Prize lecture where he very eloquently admits that we do not fully understand the economy and we probably never will. It's not just a question of doing more statistical analysis or thinking a little more deeply. In fact, inevitably some kind essence of it is hidden from us. The knowledge we need to manipulate that system is never going to be sufficient. I think it's his agnosticism about macroeconomics that is not a particular flavor that is most powerful from Hayek. Just to speak a little to the visual: When he says, Not some circular flow, we put up old footage of pistons, again a reference to the automobile, the engine. We are tapping into a very broadly referenced analogy where the economy is a car that got dug into a ditch. Spark the car. The economy is not a car. We aren't gears in the engine of a car. It's an organism. Organic. It's an ecosystem like a rainforest. You can't possibly imagine, none of us could imagine even what we would need to know to hold in our heads this thing and call it a system. So, to be fair, when Keynesian the economy is like a car that needs a spark, that's just a metaphor. They understand it's not a car. We understand it's just a metaphor, but it's not a good metaphor. The wrong metaphor. To be a little stronger critic: When you calculate a multiplier with decimal points, it suggests that your treatment of the economy is maybe a little more car-like than simply a pure metaphor. But it's an engineering metaphor; engineering systems are susceptible to analysis and decimal points. Our response to that is it's a bad metaphor. Those decimal points are deceiving you about your ability master and understand the system. A better metaphor is one that is more organic, more complex, more emergent. That's what we think is the right way to think about that enterprise. I also think that criticism cuts both ways. The Austrian side, and the Austrian/monetarist side I suppose, there can be this very sort of fieldlike approach to monetary impacts. We haven't had a hyperinflation. We don't really have a full understanding of the ways in which money impacts the economy. For sure. The equation of exchange, MV=PQ, is not some closed hydraulic system any more than Y=C+I+G. There is a lot of complexity under the surface.
1:03:19Want to take us back to our earlier conversation and insights. Whenver I talk to people about WWII and whether it was good for the economy or not, even people sympathetic to that idea, that it didn't help, they always ask me the same thing: Well, then, what did end the Great Depression? As if there had to be a switch, lever. So, it wasn't that steering wheel turn. So, what was the steering wheel turn? What was the carburetor set to that allowed the engine to get healthy again? Our conversation about Say's Law, the discovery process, the sources of value, the sources of real prosperity, the search for the entrepreneurial aspects of the modern economy, the complexity of it, the organic nature of it: really speaks to this issue. I didn't want to leave it untouched. When people ask: What did end the Great Depression? I always say: The passage of time and returning to a place where people could, as we say in the song: People had a chance to discover the most valuable ways to serve one another. The only way we get prosperity is by producing things other people care about. We don't know what those things are. They can't be predetermined in advance. They are not found in a cookbook or recipe or manual. The claim of Robert Higgs and those sympathetic to his viewpoint and those skeptical of the Keynesian argument is that the frenetic fiddling of the 1930s created the uncertainty that made it hard for people to make the plans and investments and took away the confidence they might have in the future that would allow the economy to get healthy again. Once the war was over and it was clear that price controls were done, and it was clear that people were able to make choices, they jumped in with two feet. And the world got healthy again. I'm not suggesting that capitalism is always a self-sustaining, healthy system. Obviously it can have problems independent of bad public policy. But the idea that you have to have a mechanism or lever as to why people were able to get back to work and do things for each other, which is what a modern, decentralized economy builds on and the division of labor is all about, one part of that answer is they were free to do so and they did. I just reject the notion that there is just some fundamentally different problem going on after the trough. It's the same problem. We are all trying to figure out how to make our lives better, how to make other people's lives better. Maybe not intentionally; maybe just in terms of how do I sell my product so I can do well; but then other people must enjoy it. That's the invisible hand. There's all kinds of problems there. It's the same question as: Why do some nations seem to have consistently different rates of growth? We don't know. So many things. There's the culture. I think and I both agree, actually, that of all the broad insights of Keynes, the role that is important: mood and psychology. Economics is certainly not a physical science. But if anything, it's probably closest in my opinion to a kind of sociology. What people think about value. If that's not a sociological or psychological thing, I don't know what is. The attack on Hayek, which mainly seems to come from people not familiar with him or the Austrians, that: Well, you look at the world as perfectly rational beings. The Austrians are anything but that. People are purposeful, but they are not perfectly rational. I have no idea what that means. That's a Chicago School influence on free market thinking; that's a different strand. It's definitely not Austrian. I'm rambling a little bit. But absolutely mood matters. I'm trying to get a company up and running; it makes a big difference whether people feel willing to take risks, whether they feel positive about the future. And that gets translated into markets. Markets aren't just us. Go to a place where you interact with people. My local baker. Social connection that happens there. I met my wife, Lisa, a co-producer on the project, at work. The commercial process is a human process, not a car, not a machine, not Marshallian curves. Not x's and y's. Roberts' influence on me is to think of the economy in this organic way. I want to address one more thing: Keynes, the cronies, and too big to fail. Keynes, I don't think, would have argued necessarily for bailing out banks or cronyism. However, his system, his top-down system that concentrates power--he put it best as an infamous quote. In his German edition of The General Theory, he noted in the preface that the theory of production put forward was more easily adapted to a totalitarian state than an economy with a high degree of laissez faire. He was not advocating totalitarianism, but he was noticing and pointing out that it sure does make it easier to control the level of spending and production if you have a totalitarian state. There is a natural bias if you provide the tools for planners to control that, by golly, take a hold of that wheel; and when you need to maintain spending in the bunch of insolvent banks, I'm not sure how else you are going to do it besides bail them out. Our depiction of Keynes and his interaction with the bankers and "cronies" is not a suggestion that he was in cahoots with them. Visually, directorially, that moment at the end where he looks to Hayek, he comes into that room with Hayek as friends and they have their moment at the end as friends. And that's as it was. And that's what this is about. And the people that rush to him in support of him, our very much editorialized depiction of what we believe follows from the tools he provides, people can say we are wrong and we are slamming him. But we are not suggesting he is an active crony pulling strings behind the scenes. The too big to fail issue and the bailouts of banks--we brought in that issue into the song because so many people have seen the current crisis as an indictment of Hayek's worldview; so it would be perfectly natural, as many Keynesians have, to say, well, the reason we are in this mess is we trusted the marketplace. And that's why we have that little digression toward the end of the song about why Keynes could interpret this as a failure of regulation and how Hayek would respond in saying: Well, we've been bailing out losers for a while and when you bail out the losers there's no end to the cost / Capitalism is a system of profit and loss. We just wanted to get that in there. Same debate, folks. The record is pretty clear. If you look at today's most effusive advocates of Keynesian economics, their review of what should have been done with Lehman Brothers is not that it was good let them fail. We should have let the other ones go down, too. Pretty categorically, according to those folks, we should have bailed them all out. That was the only mistake according to those folks. We're not crazy, folks. Well, speak for yourself, John!
1:13:19Music from the rap video "Fight of the Century".

COMMENTS (42 to date)
Big Al writes:

Thanks for another awesome video!

wilmpete writes:

The discussion reminded me of the South Park Episode: Margaritaville. Kyle uses a very Keynesian solution where he bails out South Park with a Platinum Card.

Big Al writes:

It's great that you ended with Hayek's "agnosticism viz macroeconomics". I think it goes so well with the other points, because our intelligence as a group, as an "economy", is far greater than one individual person's ability to understand the whole.

Spike Dunn writes:

I just wanted to throw in that I found econtalk in the same way that John did - by becoming obsessed with "The Black Swan" and then finding Russ's interview with Nassim on fooledbyrandomness.com.

John Wiles writes:

Awesome, awesome, awesome podcast guys. It was so thought provoking that it took me 2.5 hours to listen to as I had to pause it several times and mentally pursue my own tangents.

Also, I love the video. Great job. Thanks for all you do.

-John

AHBritton writes:

Russ,

Initial reaction to the video, not the podcast.

I have a couple of questions. Did Keynes' suggest bailing out "too big to fail" institutions? This video seems to imply that and I am curious if there is evidence of such a position.

Also, I know you have done a bit of reading of Hayek and other's in the Austrian camp, how much do you read of Keynes in preparing for these videos?

One bit of criticism as well. It is common it seems to me for people to always present themselves as the underdogs, and this video seems to be somewhat of an example of that.

Although I know that the belief that gov't spending leads to increased GDP and austerity decreases growth in the SHORT TERM are widely held beliefs among economists it seems to me, the idea that Keynesian ideas unfairly and unquestioningly dominate the discourse is rather myopic it seems to me.

Many Keynesian's (possibly most) have been dissatisfied with current policies, similarly Austrian's were dissatisfied with the Reagan administration despite it being such a "Free Market" oriented administration, the only way for someone to be completely satisfied with a governments overall policy choices is for them to become dictator.

That being said, there is LOTS of (albeit not high quality in my opinion) discussion of principles that Hayek discusses. Although I believe they are often disingenuous in their rhetoric and actions, it seems to me that many (Republican's almost exclusively) would drastically cut spending and reduce taxes if they had the ability to do so unilaterally, and in general they have been making the case for this in public. Have you heard any discussions about large government stimulus and make-work programs lately?!?

Also where do you put Milton Friedman in this whole battle? He definitely was not an advocate of fiscal stimulus, but definitely DID want to "stimulate" the economy through monetary policy.

I loved the video though! A great conversation starter.

Hopefully we can get a little bit better discussion of the "nuts and bolts" elements of policy, instead solely the broad stroke representations?

For instance, do you think money has a role in the "real" economy outside of the credit distortions during the boom? Without increasing the money supply drastically, there would have almost certainly been significant deflation (not something Milton would have enjoyed I would think), would this have been fine?

What exactly would banks be doing with there money without buying treasuries, and would it be put to productive use? Does it matter?, etc.

John Strong writes:

What an incredible thing of beauty the new video is. It moved me, man. :-)

Russell writes:

Has anyone examined World War II as a time when 1)money was being disseminated into the public through war spending, 2) rationing was limiting public consumption of consumer goods (much production diverted into war production that had little utility in the consumer economy), and 3) the fact of the existential war made the inability to spend your "war" wages on what you might have bought otherwise a reasonable deferral of customer desires . As a result of all that there was a increase in customer demand for things that the public wanted which, combined with the successful end of the war, resulted in people with money, not enough things to satisfy demand, a more optimistic view of life than say during the depression years, and industrialists and such now with productive capacity that was no longer being diverted into war production.

Hence, when war spending ended, there was a considerable pent up demand and industry could turn towards satisfying that demand.

What makes the current wars and disasters not the same as WW II is that there is no restriction in consumer demand (like rationing in WW II) so there can be no pent up demand (to be released by the successful end of the war) and the apparent economic distress has meant that extra money does not necessarily go into unrealized desires but into hedging against the uncertain future. (Guess that's the velocity of money?)

During the Great Depression, what was restricting consumer demand was to an extent a lack of money and when money became available it went out to meet necessities but people were still hedging to the extent possible against the uncertain future. After all, the government money may end next year and then where are you?

So I'd wonder if the Keynes theory is a special case, since restricting consumer demand in not acceptable except in certain circumstances, while Hayek is more of a general case since it may impose less in the way of conditions on implementing itself.

I am not an economist so I figure I am missing a lot.

Seth writes:

The story of how the idea evolved from 'something' to a 30 minute sitcom pilot, to Stayin Alive and so on was a great story of adaptation.

Also, a nice tidbit about using a scratch track to test something out. It's always good to know that you didn't hit the home run on your first swing. But you also made sure the the test swings didn't cost very much.

Excellent work.

Thanks for the info on Say. I've thought that for awhile but wasn't sure who to reference on that for reading.

Hugo writes:

Russ so I have to say this is the first podcast in which I was actually suffering waiting for the podcast to end.

This was a good video and the beat of the song was great...but you should stick to your day job. Both the video and this podcast were very one sided and as a fan of Keynes I did not enjoy either.

This podcast should be ranked the highest in lack of intellectual curiosity. I have to admit that I lost a little respect for you after this podcast.

Mike.Montchalin writes:

Likewise, I discovered econtalk by googling "Black Swan."

It seems Russ Roberts exposed himself to a good Black Swan by unenthusiastically availing himself to a collaboration with a crazy NJ listener!

I didn't appreciate the genius of this video until after listening to the podcast.

Very interesting that Hayek has a predecessor in Say, and that Keynes has predecessors in Malthus and Hume. I wish more time was spent on the that.

Great podcast. Great video.

Thanks

Martin Brock writes:

I'm usually a disagreeable curmudgeon and let others do the congratulating, but you've both made a great contribution with this video. It's both inspiring intellectually, to someone who thinks like me, and a wonderfully lyrical song. It's catchy. I enjoy listening to it. My wife, who teaches history to special ed students in high school, agrees that the second video is much more accessible.

Critics accusing you of misrepresenting Keynes overstate their case IMO, but the video beautifully represents Hayek and "libertarian" thinking. We are not apologists for the wealthy and powerful, just the opposite. Liberal, market economics is not a prescription for enslaving common people to feudalistic lords. It's bottom up, not top down. Thanks for teaching the lesson.

David B. Collum writes:

I had an interesting exchange with one of your colleagues at the Hoover Institute after one of his Econtalk podcasts:

Me: "The role of WWII as an extension of the Great Depression: If one looks at the enormous sacrifice, drop in personal consumption, and extraordinary small footprint of the average family, couldn't you make the argument that 1941-45 was the final years of the depression coated with a very thick salve of patriotism? Seems like Andrew Mellon eventually got his wish."

Your Guest: "Privation on the home front was neglibile, despite the folkloric memory of rationing, Victory Gardens, etc. The fact is that the US civilian economy grew c. 15% during war-time, a singular achivement among the major combatants in that war, and a rare one in the history of warfare."

I think you guys are dead right: GDP is not a measure of prosperity. This is especially true when it is measured by those with political agendas.

Russ Roberts writes:

Hugo,

Sorry to disappoint you. Here are the readings John and I have provided as background for the podcast. You'll find work by Fazzari, Skidelsky, Krugman, DeLong, Posner, Zandi, Blinder, and Stiglitz. So if you're tired of one side, there's plenty to choose from.

Charlie writes:

I was going to nitpick with all the things that irritated me with the discussion, as I still think there's a lot of mis-understanding (especially with Russ) on Keynesian arguments (and especially using Higgs' critique). But by the end, I was just more impressed that the rap came out as well as it did. I don't think the mistakes that showed up in this discussion showed up in the rap, so all the procedures and work you must have put into getting it right really paid off. That's very impressive, and a great achievement. The rap captures so much of the debate between the two; it's clever and well written, and the production is impressive.

Charlie writes:

As to the central planning quip, I agree with the Tyler Cowen/ Brad Delong consensus. Hayek may well have called Keynes argument a "central plan" and he would have used the same language for Milton Friedman.

From the transcript of commanding heights I recalled this story from a conference Hayek initiated:

NARRATOR: The debates were passionate. At one point, Hayek's former mentor, Ludwig von Mises, stormed out of a meeting.

MILTON FRIEDMAN: In the middle of a debate on the subject of distribution of income, in which you had people who you would hardly call socialist or egalitarian, people like myself, Mises got up and said, "You're all a bunch of socialists," and walked right out of the room. (laughs)

And also, this quote from Delong's blog by Hayek, "From that point of view [ability to be statistically tested], Milton's monetarism and Keynesianism have more in common with each other than I have with either...."


The rap did a really good job of showing that the debate is really between Hayek versus the Keynes/Friedman consensus, which we might also view as Austrian versus Mainstream. I liked that almost all of the verbiage/metaphors could be applied to monetarism as well as Keynesianism.

bluhawkk writes:

Didn’t get why Keynes was declared the winner. The fix was in?

Is the cycle that Keynes theory is strengthened during depression/recession when politicians look to assuage the public fear by government intervention, with Hayek theory re-emerging during times of growth and prosperity and deregulation?

John S.Papola spooky Bernanke lookalike. Great video.

AHBritton writes:

Russ,

Having listened to the podcast I have to say I really enjoyed it. Although it was rather rambling, I think the fact that it was a discussion with an "amateur" economist provided a great opportunity to discuss fundamental issues. It seems to me this should be a style you return to, possibly with "professional" economists, but focusing more on fundamental points and philosophical differences, personally I think this is where most of the disagreements among economists and others resides.

With that in mind I am curious, don't you think someone could be as equally skeptical of the economics profession in many ways yet still remain a Keynesian in most ways?

One thing I think your argument ignores is that both sides are arguing for prescriptive actions to be taken for the most part.

For example, many (if not most) Austrian adherents wish for the Federal Reserve to be eliminated because they have a belief about the effects it has upon the economy. I am sure they would describe it as simply "freeing" up the system, and introducing "competition" in currency, but (assuming we are not abolishing the state) this is simply changing the legal order of things and could be implemented and structured in any number of ways.

I guess another way of putting it is this (again assuming a system aside from anarchism):

The government is essentially placed in the position of "rule-maker." It decides what counts as currency, what counts as fraud, whether or not someone deserves compensation for being wronged, etc. For the most part people in the libertarian camp are advocating a specific "set of rules" that they think are best for a healthy, free-ish, prosperous society. The opposition has an opposing set of rules and systems that they think provide this.

In either case you can be skeptical of the ability of "economists" to develop accurate representations of the "macroeconomy" (many state-interventionists are as a matter of fact, more so than myself).

Possibly a diversion, but I think relevant to the conversation. Bernie Madoff perpetrated a massive fraud costing investors likely over $10 billion dollars in fraud.

Many in the SEC and other financial regulatory agencies at the time he was perpetrating this fraud (at least in its final stages) were ideologically opposed to regulation it seems to me.

Greenspan and others were of the mind that "markets" work best when left "alone."

Now on the other hand Madoff's investment firm WAS regulated, and Madoff himself was involved in creating those regulations.

So it seems to me that from this perspective you could use the facts of the matter as either an argument for increasing regulation OR the ineffectiveness of regulation.

BUT, I don't see how eliminating or reducing regulation would have improved this instance, and I ALSO don't see how the "market signals" created by this event would correct it either.

Sorry if I have done some rambling of my own :)

One thought I have is that maybe it is best for those who write the laws to be non-interventionists, but those who enforce them to be highly interventionist!

any thoughts?

Eric Mauro writes:

I am much more interested in hearing what Mr. Papola has to say as a film-maker and how that connected him to the material. My own experience making and selling fine art has drawn the basic processes of production, marketing and sales much more clearly than when I was a corporate drone.

I have long suspected that art went off the rails in tandem with the way economic tore itself away from its classical roots, and collectors and connoisseurs who were at the top of the pyramid sought art which comforted them in their decisions. Even if their decisions were in favor of chaos.

In what ways does the business of film-making clarify the primacy of production? In what ways does it deny that primacy?

Krishnan writes:

Terrific video - there is much we can learn from it ... very balanced I thought - no cheap shots -

The idea of bringing "back to life" characters as Keynes and Hayek reminded me of the Steve Allen/Jayne Meadows show "Meeting of the Minds" (PBS I think, late 70's early 80's) - They used to bring historical characters to life - gave them words that those characters may have used in discussions ... Imagine Socrates discussing ideas with say Gandhi or some such ...

I enjoyed the podcast also - I was struck by how careful both of you were in presenting Keynes in the best light possible and for the explanation of why the depression may have ended - the end of uncertainty in the marketplace and the lifting of price controls - so those that could make can supply to those that may want

thanks

Mark writes:

In a nut shell. Why won't the Keynesian business cycle revert back?

Is it because as the Austrians have stated that during the boom cycle certain businesses arose as a fiction due to false capital via fractional reserve banking?

Did the whole amassing of debt lead to qualitatively different state of the economy? From which there is no going back to as Krugman would have us believe is possible?

Schepp writes:

Russ and John,

Excellent work. The podcast was an excellent follow up to the video. Through much of the video I was wondering which parts were quotes and what was artistic license.

I was very satisfied with the content and I view the video not as what is fair or unbiased but the view of to classically liberal guys trying to make their point.

The "I am not a central planner" dudes should make their own video and see if stands up to the same unbiased bar they are applying to your video.

I thought the Say discussion was awsome in the podcast.

eric mauro writes:

@AHBritton -- the answer is in John's comments about how old this discussion is. Look at your example of currency for instance. State banks during the early part the 19th century in the US depended on a varying perception of their solvency to maintain the value of their notes. Sometimes they blew up. But worse their currencies experienced swings in value that were inexplicable in any usable sense and certainly inconvenient.

In response we have evolved a centralized system for currency. So people are willing to give up the freedom for the assurance and just plain convenience of central government.

One blind spot of the Austrian worldview is that the adherents never seem to see the advantages of centralization, only the dangers. So they can never form a convincing explanation of why the public goes along with giving up some freedoms for an outwardly clunkier move in the system. Our economic forbears in a way had a clearer picture, because their examples included tyranny which occasionally performed well.

The swings back and forth are the basic cycles of chaos, centralization, corruption and breakup. An economic stance on the Depression for instance becomes ascendant when it explains the past in a way that is useful to the present. Don't forget that the Keynesians were battling not with supply-siders but with austerity-focused Republicans who had a basic platform of raising taxes to balance the budget. It was the Keynesian-oriented Democrats, including FDR during the 1932 election, who at least in part were suggesting that we cut taxes and tariffs.

David B. Collum writes:

Two more points:

(1) "Greenspan and others were of the mind that 'markets' work best when left 'alone.'"

I gotta challenge that one; Greenspan is one of the truly most invasive central bankers of all time. As a fan of Austrian economics, I refuse to let him be hung on my roster.

(2) We got a great lesson in market intervention this week. You have a wild and wooly commodities market fueled by low interest rates. I would love to see it a little more tame with a lower dosage of steroids. (I am heavily invested in both the energy and metals sector to hedge inflation because of those steroids.) So then you get the CME jumping in and hiking margin rates five times in eight days. I would be happy to see the Fed-sponsored margin eliminated, but this move was akin to changing the rules repeatedly in a sporting event at the discretion of the other team. This is shameless stuff.

AHBritton writes:

@David B. Collum,

"I gotta challenge that one; Greenspan is one of the truly most invasive central bankers of all time. As a fan of Austrian economics, I refuse to let him be hung on my roster."

I know by it's very nature the Fed is interventionist, but what exactly supports your claim that he was more invasive than predecessors?

I know Greenspan was not an Austrian, but he was philosophically rather close. Appointed by Reagan and accompanied by Ayn Rand to the White House when appointed, Greenspan undoubtedly had deeply held beliefs regarding the inefficiency of government intervention and the supremacy of the market, even if his action may have not always reflected this.

I have heard of many accounts during Greenspan's career in which he resisted and opposed intervening in the market or imposing further regulations or oversight even when the Fed legally was able to.

I don't have the examples in front of me but I can get back to you with them if you wish.

What is your support for his extraordinary interventionism?

LowcountryJoe writes:

I really enjoyed this podcast and how you and John wrestled with the lyrics and now criticism of the 'central plan' backlash. I found you two to be more than fair to Keynes and his offshoots. What else are you supposed to call the removal of decentralized decision-making if not central planing; some group of bureaucrats has to decide how to spend collective [a.k.a. the taxpayers] money.

I do not understand why economist like Brad DeLong get defensive about this and have to cut and paste 10 plus paragraphs of unsimplified quotes from a book. The again, my simpleton self does not understand how any trained economist can be so suspicious of market forces and feedback signals and yet still call themselves an economist. Why is it that so many macro-extolling Left-leaning economists seemingly hate markets anyway and why do they not get called out for it more often?

AHBritton writes:

Let me try to briefly make a more micro argument for why Keynesian might make sense on a macro level.

The majority of economists (I believe even you Russ) accept the idea of externalities. (so once again this argument will not work for anarcho-capitalist's who often deny their existence)

What is I think both the beauty AND the difficulty with the modern market system is the role of information. Very little information is required to complete a market transaction. To use a rather famous example, I need to know little to nothing about the many hundreds or thousands of people and processes that went into the production of a pencil in order to purchase it.

As has been often pointed out this is a beautiful and wonderful system on one level. If people had to make a pencil themselves, or were required to understand the details of who and what went into the making of every pencil and product in our daily lives we would be incapable of maintaining any reasonable standard of living, or participating in almost any market transaction.

This does not mean, in my opinion, that this knowledge is unimportant. As an over-the-top illustration, it would be possible that the main financial beneficiary of the pencil you purchased also happened to want you dead. They could be using the money accumulated from selling pencils in order to hire a hit-man to execute you.

This example is surely absurd, though not in any way impossible. Although I think this specific example is rather silly, it does illustrate that we in general have very little knowledge regarding what we are actually purchasing. We may look at consumer reports or take the advice of a friend who has used such and such a product, but the secondary effects of your purchase are nearly impossible to investigate, even if the desire to exists.

This is most definitely part of the human condition, knowledge is imperfect and dispersed.

Although it is most certainly true that we cannot collectively allocate materials such as bread, cars, iPods, etc. that doesn't necessarily mean that the market processes that allocate these resources can't be improved by collective decision making.

For example, a slightly more realistic example would be a popular pencil manufacturer who as a cost cutting measure dumps methyl-mercury into a stream running through it's property because to dispose of it more "thoughtfully" would have a high cost and make those pencils less competitive.

People implicitly "support" the dumping of mercury by purchasing the cheap pencils, however certainly would not if their knowledge was more complete. Collectively it is easier to prevent the dumping of mercury, or the murder of people, BECAUSE knowledge is dispersed and it is impractical to assume each individual will investigate the practices of every one they trade with in the economy.

The way this can be applied to recessions is that just as the pencil purchaser "logically" purchases the cheap pencil despite it's unseen costs, the individual logically attempts to greatly increase their stock of currency (or other perceived stable commodity) when their is economic uncertainty in order to hedge against risk.

Before I continue I would like to point out something else. Although I can think of no good examples where a centralized government has efficiently allocated and made strides in the production of, let's say, rice. I think it is very hard to deny the governments involvement in strides made in technological research and development, especially of the capital intensive, long term pay-off sort.

To make clear, I do not believe that a government agency could have made the iPad, or any other of the multitude of personal electronic devices available today, but when it comes to much of the initial development and advancement during the capital intensive and risky initial stages of development (remember few foresaw the dramatic effect things such as the Internet would have before hand) one would be hard pressed to find a technology that wasn't significantly advanced, invented, or developed directly by the government or without significant government funding and help. Whether it be the Internet, telecommunication satellites, microchips, jet planes, etc.

Now it could be argued that just because that is the way it happened to have developed doesn't mean the "market" wouldn't have done it anyways, even so at the very least it illustrates an example of not complete state, centrally planned incompetence in every endeavor.

I have gotten somewhat side tracked and this message will already likely be held up before they post it so I'm going to take a break.

AHBritton writes:

Russ,

One think that I feel is likely an important method for helping to overcome bias is really trying to defend a view you personally do not hold.

I notice Russ when you play devil's advocate that you take on a somewhat sarcastic tone of voice and put very little effort into actually advocating the position.

Not that I am likely much better than most, but I feel that it has been helpful for me to attempt to REALLY debate people from a viewpoint I do not hold. I think everyone should try this. I have honestly gotten rather worked up defending ideas I do not hold and I find it makes me a lot more sensitives to the actual arguments involved because I am more interested in their strengths and flaws than the positions they support.

Also I find it has made me a lot more willing to argue various ideas I might simply be slightly enamored with, and to let go of those ideas more quickly when they seem to be unable to handle scrutiny.

Richard W. Fulmer writes:

Curse you, Russ Roberts! I've got the tune in my head and can't get it out!

Hugo writes:

Russ

Just wanted to say thank you I will be sure to read all the other readings you used and thank you for providing the link. I will keep listening to you because I know that in the end you are always pretty good at sharing the information from both sides.

Thanks and looking forward to next week's podcast. I actually just finished reading OECD demand regimes (1960–2000) by C.W.M. NAASTEPAD AND SERVAAS STORM on the Journal of Post Keynesian Economics / Winter 2006–7, Vol. 29, No. 2 213. Look it up and I would love to see a podcast with one of these two guys and specifically on the topic of real wage growth restrain and its effect on growth on OECD countries.

Thanks again,

HP

AHBritton writes:

To complete my "short" thought:

There definitely needs to be a certain amount of unemployment and "slack" in the economy for discovery to take place. It is difficult for new productive endeavors to begin when there is a highly limited pool to hire from. Their are various things that can definitely effect the discovery process, such as the "cost" of hiring a new worker, or starting new business, etc.

Also I think the discussion of Say's law might end up being too abstract to be helpful, and I think the island metaphor is inappropriate for a modern "macroeconomy."

It is true that on an island you require something of value, possibly created through labor in order to create "demand" out of desire. But why do you create something in the first place? In order to satisfy a perceived demand from another. After all, why don't you simply make mud pies? What about Say's law explain's the obvious fact that one can't simply create anything, but must create something that satisfies a demand.

It is somewhat of a chicken egg argument, however. You can't supply someone's demand without first having someone capable of demanding it and you can't demand something without first having something to supply.

That being said I do think it is important to think about the process by which a modern economy operates because we are not on an island.

Even using Say's law as a basis I think we could devise a Keynesian story.

People need to produce in order to trade for the currency that they then use to make demands. How do they go about this process of discovery if people are either not demanding much, or their demands are distorted towards the types of good people favor during a recession?

For example, I am a music teacher who mostly works as a private contractor.

Let's say that there are already too many private music instructors and I should really look into another line of work where there is demand.

It would be difficult for me to get that signal because demand is down IN GENERAL. People ARE cutting back on "extras" that they might view as less necessary.

When looking at the job market I am discouraged from changing professions because those fields which require little previous experience are not hiring many and are inundated with applications for the few positions they are offering (this is hypothetical by the way as I have been somewhat lucky that people still desire private music lessons and because of my education in the field I am part of a more limited supply of skilled workers).

This creates a breakdown in the signaling because I am unable to create something of value to transfer my desires into demands, similarly others are unable to do the same, so I am unable to "discover" what types of goods and services would become demanded if those who have desires also attained the means that are available during more stable and prosperous times.

Sorry for the length, but I don't think these issues are terribly simple.

One of your best podcasts ever. Love shows. Great.

And you rephrased the Say's Law nicely: Only supply creates its own demand.

Michal Kvasnicka writes:

Hallo Ross.

I've just seen your video. That's absolutely great. I'll ask my student to watch it. Many thanks.

Michal

Eric Mauro writes:
I am unable to "discover" what types of goods and services would become demanded if those who have desires also attained the means that are available during more stable and prosperous times

If you're a customer who wants a new product, and you go to the marketplace and nobody offers it, there is no way for you to signal through prices what you want.

It works in a different way than you're imagining. Seven music instructors would start slightly different businesses branching out into new areas. Maybe one survives and that's how you find out what the new angle is.

This is why the focus on the producer is so important, because that is how new products and innovations are developed.

AHBritton writes:

@Eric Mauro

"If you're a customer who wants a new product, and you go to the marketplace and nobody offers it, there is no way for you to signal through prices what you want."

In our current economy I think it is much more likely that the product IS offered but that few people are able to turn their desire for the product into a demand because they have nothing to trade in exchange because they are unemployed and unable to find productive work.

"Seven music instructors would start slightly different businesses branching out into new areas."

It seems to me the problem is that instructors (I'm using this as a generic job and it is probably not the best choice) are not starting up in general because there potential customers have nothing to trade.

For example there are plenty of cheap products out there because there is plenty of supply, I personally haven't notice a lack of supply, have you? People have plenty of products to sell, for reasonable prices as well (especially if you want a house, but that's another matter). So if there is plenty of supply to trade, what's the problem?

Large amounts of often low skilled workers unable to transform their desire into demand because they have no wages to purchase with.

AHBritton writes:

@Eric Mauro,

Just to clarify, and correct me if I am wrong.

Is the claim being made that there is a scarcity of products and services in certain sectors?

If this is the claim, I am wondering what the evidence for this is?

It seems to me that I have heard virtually no anecdotal evidence, nor any statistics which support this, but I could be wrong (I often am :)).

It does not seem to me that I have seen lots of empty shelves, or been unable to find a specific product when needed. If someone in this economy has the ability to, I see nothing to prevent them from purchasing virtually any good they wish.

This seems to me like another issue with this argument. Stores and businesses in general seem to have plenty of supply and many employees willing to provide services to people in the economy. It seems that according to Say's law (which I think it more of an attach on Monetarism than Keynesianism in many ways) the fact that there is not a lack of supply would mean that there shouldn't be a lack of demand. That it is simply a matter of getting the various parties in contact with those willing to exchange... which it seems hard for me to believe in the age of global markets and internet purchasing.

I apologize if I am incorrectly characterizing your argument.

eric mauro writes:
they have nothing to trade in exchange because they are unemployed and unable to find productive work

Yes, you are right that the seven producers could bring their service to the market, and there might not be any buyers at all to communicate which of the seven has found the correct innovation.

In the classical interpretation they would say you have to look for barriers to the production on the side of the people you want to trade with, and remove those barriers. They assumed that everybody would want to produce as much as they could with the raw materials available. In a world where five billion of the six billion are living in serious poverty, we can also assume that there is plenty of unused productive capacity out there.

In their case the obvious examples were mercantilist tariffs. But we could add a hundred others: taxes, regulations, wars, natural disasters, drugs, and also various uncertainties like political instability, currency fluctuations, terrorism and so on.

Your responsibility as a producer is just to bring the best product you can to the market, it's not up to you to create the product you want to trade for too.

James writes:

Brilliant work Russ and John. Seeing these videos gives all educators hope for the future.

Jonathan writes:

I like many of your podcasts very much.

But sometimes, like this one, you try to represent views you are opposed to and then "debate" them. But you really present straw man versions of the views you disagree with so the debate is uninformative (or mis-informative).

Some of your best podcasts have real and articulate proponents of views you disagree with and you have a real debate with both sides well represented.

Video is well exectuted. Entertaining but misinformation.

AHBritton writes:

@eric mauro

"Your responsibility as a producer is just to bring the best product you can to the market, it's not up to you to create the product you want to trade for too."

True, but people don't usually just "produce," at least not in a vacuum. Companies only hire you to "produce" if they believe there is a market for their product. Business owners only produce what they can reasonably expect to sell. New business starters usually require loans to get started and an expectation that there is a market for what they want to produce. No one believes just producing something will open up a market to them without a prior demand.

Arturo writes:

I had a hard time listening to the whole podcast about a song and video without listening to the song 1st. So the whole podcast sounded like a defense of how fair you were to Keynes. If you were truly fair then an hour of econ talk could have been spared.

After listening to the rap song I can see why you spent so much time defending yourself. The lyrics did not represent Keynes but used Keynes quotes to set-up a Hayek punch (an easy punch aka sucker punch). Hayek always had the last word, except maybe once or maybe not.

I like your podcasts with the presentation of facts and research and naming and explaining of the economic theory being discussed. I like learning.

Todd writes:

I thoroughly enjoyed your discussion and watched the video prior (on youtube) to give me better context.

During the discussion, you mentioned that after you have destroyed their Keynesian theories, people ask you "Then what ended the Great Depression?" I believe you had the right answer without realizing it. The economy is the sum total of individual decision making about buying and selling. The key point is 'decision'. The broadest bottom up decision making makes for the most efficient and successful economy. Once the Government stopped making decisions for the people - whether through Keynesian programs or the war effort spending and wage and price controls - and individuals were empowered to make their own decisions, the economy recovered.

Best Wishes for your next video.

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